BARFRESH FOOD GROUP INC. 10-Q

Item 1. Financial Statements. Barfresh Food Group Inc. Condensed Consolidated Balance Sheets March 31, December 31, 2022 2021 (Unaudited) (Audited) Assets Current assets: Cash $ 4,284,168 $ 5,532,840 Restricted cash 250,382 142,382 Trade accounts receivable, net 1,719,937 1,222,476 Other receivables 231,959 - Inventory, net 850,802 705,349 Prepaid expenses and other current assets 101,396 63,859 Total current assets 7,438,644 7,666,906 Property, plant and equipment, net of depreciation 1,456,527 1,588,043 Operating lease right-of-use assets, net 70,176 87,391 Intangible assets, net of amortization 354,173 370,278 Deposits 6,746 6,746 Total assets $ 9,326,266 $ 9,719,364 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,377,590 $ 974,218 Accrued expenses 202,336 228,227 Accrued payroll and employee related 223,292 212,465 Lease liability 76,731 81,295 Total current liabilities 1,879,949 1,496,205 Long term liabilities: Accrued interest 33,600 33,600 Lease liability - 13,701 Total liabilities 1,913,549 1,543,506 Commitments and contingencies (Note 5) - - Stockholders’ equity: Preferred stock, $ 0.000001 par value, 5,000,000 shares authorized, none issued or outstanding - - Common stock, $ 0.000001 par value; 295,000,000 shares authorized; 12,919,899 and 12,905,112 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively 13 13 Additional paid in capital 60,471,988 60,340,620 Accumulated deficit ( 53,059,284 ) ( 52,164,775 ) Total stockholders’ equity 7,412,717 8,175,858 Total liabilities and stockholders’ equity $ 9,326,266 $ 9,719,364 See the accompanying notes to the condensed consolidated financial statements 3 Barfresh Food Group Inc. Condensed Consolidated Statements of Operations For the three months ended March 31, 2022 and 2021 (Unaudited) 2022 2021 Revenue $ 2,525,549 $ 1,014,851 Cost of revenue 1,709,873 665,532 Gross profit 815,676 349,319 Operating expenses: General and administrative 1,549,039 751,601 Depreciation and amortization 161,146 146,933 Total operating expenses 1,710,185 898,534 Operating loss ( 894,509 ) ( 549,215 ) Other (income)/expenses Gain from derivative liability - ( 16,787 ) Interest - 59,091 Total other expense - 42,304 Net loss $ ( 894,509 ) $ ( 591,519 ) Per share information - basic and fully diluted: Weighted average shares outstanding 12,909,204 11,471,798 Net loss per share $ ( 0.07 ) $ ( 0.05 ) See the accompanying notes to the condensed consolidated financial statements 4 Barfresh Food Group Inc. Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2022 and 2021 (Unaudited) 2022 2021 Net cash used in operating activities $ ( 1,132,148 ) $ ( 410,574 ) Investing activities Purchase of property and equipment ( 13,524 ) ( 4,647 ) Net cash used in investing activities ( 13,524 ) ( 4,647 ) Financing activities Proceeds from issuance of stock 5,000 - Proceeds from note payable - 568,131 Net cash from financing activities 5,000 568,131 Net change in cash and restricted cash ( 1,140,672 ) 152,910 Cash and restricted cash, beginning of period 5,675,222 1,959,269 Cash and restricted cash, end of period $ 4,534,550 $ 2,112,179 Cash paid during the period for: Cash paid for amounts included in the measurement of lease liabilities $ 19,648 $ 19,076 Non-cash financing and investing activities: Equipment included in accounts payable and accrued liability $ - $ 23,511 See the accompanying notes to the condensed consolidated financial statements 5 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) Note 1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies Barfresh Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. The Company is engaged in the manufacture and distribution of ready-to-drink and ready-to-blend beverages, particularly, smoothies, shakes and frappes. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 10, 2022. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year. Reverse Stock Split Effective December 29, 2021, the Company amended its certificate of incorporation to implement a 1-for-13 reverse stock split of its issued and outstanding shares of common stock. All the share numbers, share prices, exercise prices and other per share information throughout these financial statements have been adjusted, on a retroactive basis, to reflect the 1-for-13 reverse stock split. Principles of Consolidation The consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation. Use of Estimates The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates. Summary of Significant Accounting Policies There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 10, 2022 that have had a material impact on our condensed consolidated financial statements and related notes. 6 Fair Value Measurement Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange. Level 2 – Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs. Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value. Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, restricted cash, as well as our PPP loan, convertible notes, and derivative liabilities which were settled in 2021. The carrying value of our financial instruments on March 31, 2022, December 31, 2021 and March 31, 2021 approximates their fair values, except for the derivative liability, which was carried at fair value prior to its extinguishment. Restricted Cash At March 31, 2022 and December 31, 2021, the Company had approximately $ 250,000 and $ 142,000 , respectively, in restricted cash related to a co-packing agreement. Accounts Receivable As of each of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was approximately $ 121,000 . The allowance was estimated based on evaluation of collectability of outstanding accounts receivable. Other Receivables Other receivables consist of amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products. Revenue Recognition In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps: 1) Identify the contract with a customer A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. 2) Identify the performance obligation in the contract Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer. 7 3) Determine the transaction price The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates or discounts, are estimated utilizing the most likely amount method. 4) Allocate the transaction price to performance obligations in the contract Since our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation. 5) Recognize Revenue when or as the Company satisfies a performance obligation The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and presented in distribution, selling and administrative costs. Payments that are received before performance obligations are recorded are shown as current liabilities. The company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from smoothie beverages. Shipping and Storage Costs Shipping and handling costs are included in general and administrative expenses. For the three months ending March 31, 2022 and 2021, shipping and handling costs totaled approximately $ 437,000 and $ 144,000 , respectively. Research and Development Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $ 31,000 and $ 68,000 , in research and development expenses for the three months ending March 31, 2022 and 2021, respectively. Loss Per Share At March 31, 2022 and 2021 common stock equivalents have not been included in the calculation of net loss per share as their effect is anti-dilutive as a result of losses incurred. Recent Pronouncements From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We have not determined if the impact of recently issued standards that are not yet effective will have an impact on our results of operations and financial position. 8 Note 2. Inventory Inventory consists of the following: Schedule of Inventory March 31, December 31, 2022 2021 Raw materials $ 102,768 $ 105,355 Finished goods 748,035 599,994 Inventory, net $ 850,802 $ 705,349 Note 3. Property Plant and Equipment Property and equipment, net consist of the following: Schedule of Property and Equipment March 31, December 31, 2022 2021 Furniture and fixtures $ 1,524 $ 1,524 Manufacturing equipment and customer equipment 3,813,763 3,800,238 Leasehold improvements 4,886 4,886 Vehicles 29,696 29,696 Property and equipment, gross 3,849,869 3,836,344 Less: accumulated depreciation ( 3,039,673 ) ( 2,894,632 ) Property and equipment 810,196 941,712 Equipment not yet placed in service 646,331 646,331 Property and equipment, net of depreciation $ 1,456,527 $ 1,588,043 Depreciation expense related to these assets was approximately $ 145,000 and $ 131,000 for the three months ended March 31, 2022 and 2021, respectively. Depreciation expense in cost of revenue was approximately $ 6,000 for three months ended March 31, 2021. There was no depreciation expense in cost of revenue for the three months ended March 31, 2022. Note 4. Convertible Notes and Derivative Liability (Related and Unrelated Party) In 2018, the Company issued Milestone I and Milestone II Convertible Notes, which were repaid and converted in the second quarter of 2021. The Milestone II Convertible Notes contained variable conversion provisions based on the future price of the Company’s common stock, resulting in the potential issuance of an indeterminate number of shares of common stock upon conversion. The Company measured the fair value of the derivative resulting from the variable conversion provisions each reporting period. The fair value was reported as a derivative liability and the change in value of $ 16,787 was recorded as a gain in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2021. Note 5. Commitments and Contingencies The Company leases office space under a non-cancelable operating lease which expires on March 31, 2023 . Our periodic lease cost was approximately $ 20,000 for each of the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, our right of use asset was $ 70,176 . 9 The following table presents the future operating lease payment as of March 31, 2022. Schedule of Estimate Future Maturities of Lease Liabilities 2022 (nine months remaining) $ 60,713 2023 20,238 Total lease payments 80,951 Less: imputed interest ( 4,220 ) Total lease liability $ 76,731 From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these, or other matters may arise from time to time that may harm our business. The Company is currently the defendant in one legal proceeding for an amount less than $ 100,000 . Our legal counsel and management believe a material unfavorable outcome to be remote. Note 6. Stockholders’ Equity The following are changes in stockholders’ equity for the three months ended March 31, 2021 and March 31, 2022: Schedule of Changes in Stockholders' Equity Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2020 11,471,797 $ 12 $ 53,223,803 $ ( 50,899,629 ) $ 2,324,186 Shares issued for warrant exercise - - Equity based compensation - - ( 34,585 ) - ( 34,585 ) Issuance of stock for services - - Net loss - - - ( 591,519 ) ( 591,519 ) Balance March 31, 2021 11,471,797 $ 12 $ 53,189,218 $ ( 51,491,148 ) $ 1,698,082 Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2021 12,905,112 $ 13 $ 60,340,620 $ ( 52,164,775 ) $ 8,175,858 Shares issued for warrant exercise 986 5,000 - 5,000 Equity based compensation - - 28,036 - 28,036 Issuance of stock for services 13,801 98,332 - 98,332 Net loss - - - ( 894,509 ) ( 894,509 ) Balance March 31, 2022 12,919,899 $ 13 $ 60,471,988 $ ( 53,059,284 ) $ 7,412,717 Warrants During the three months ended March 31, 2022, 96,664 warrants at an exercise price of $ 9.10 per share expired, and 986 warrants at an exercise price of $ 5.07 per share were exercised for proceeds of approximately $ 5,000 . 10 Equity Incentive Plan The following is a summary of stock option activity for the three months ended March 31, 2022: Summary of Stock Options Activity Number of Options Weighted average exercise price per share Remaining term in years Outstanding on December 31, 2021 625,016 $ 7.55 3.8 Issued 25,385 $ 5.58 Cancelled/expired ( 11,541 ) $ 4.94 Outstanding on March 31, 2022 638,860 $ 7.52 3.5 Exercisable, March 31, 2022 539,345 $ 7.92 3.0 The fair value of the options issued (approximately $105,000, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the following: Summary of Fair Value of Options Using Black-Sholes Option Pricing Model 2021 Expected term (in years) 5.5 Expected volatility 85.7 % Risk-free interest rate 1.5 - 1.6 % Expected dividends $ - Weighted average grant date fair value per share $ 4.15 As of March 31, 2022, the Company has approximately $ 189,000 of unrecognized share-based compensation expense related to unvested options, which is expected to be recognized over the remaining weighted average period of 2.2 years. The following is a summary of restricted stock award and restricted stock unit activity for the three months ended March 31, 2022: Summary of Restricted Stock Award and Restricted Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at January 1, 2022 - $ - Granted 40,554 $ 5.36 Unvested at March 31, 2022 40,554 $ 5.36 As of March 31, 2022, the Company has approximately $ 202,000 of unrecognized share-based compensation expense related to restricted stock awards and restricted stock units, which is expected to be recognized over the remaining weighted average period of 2.6 years. Note 7. Income Taxes ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all the deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all tax assets. As of March 31, 2022, the estimated effective tax rate for the year was zero . There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2017 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations. For the three months ended March 31, 2022 and 2021, the Company did not incur any interest and penalties associated with tax positions. As of March 31, 2022, the Company did not have any significant unrecognized uncertain tax positions. 11